–Capital Markets Subcommittee Hears from High Speed Trading Firms

WASHINGTON (MNI) – A Commodities Futures Trading Commission
subcommittee Wednesday is advancing its work on a guiding definition of
high frequency trading, now considering one worked out with a number of
industry representative, the Wall Street Journal reported.

The definition, once arrived at, will guide the CFTC’s enforcement
division in cracking down on market manipulation and other abuses. The
Journal said a draft definition is broadly written, which would be more
likely to capture a wide range of trading activity as opposed to a
narrow definition favored by many in the industry. A CFTC subcommtee,
the Journal said, will review the definition later in the day.

High speed trading is now capable of 100,000 transactions a second
and the CFTC and the SEC intend to add markers to the transactions that
allow them to be traced to their originators. A CFTC spokesman would not
immediately comment on the Journal story.

The House Financial Services subcommittee on capital markets,
chaired by Rep. Scott Garrett, hears from a few representatives of firms
with high speed trading operations in a hearing getting underway
shortly.

The hearing, titled, “Market Structure: Ensuring Orderly,
Efficient, Innovative and Competitive Markets for Issuers and Investors,
will hear GETCO CEO Daniel Coleman describe some of the services the
firm provides, including GETAlpha, an execution algorithm for stocks
trading.

Invesco Global Head of Equity Trading Kevin Cronin will testify in
behalf of the Investment Company Institute, urging regulators to
confront issues that jeopardize investor confidence. “Issues relating to
the role of market makers and high frequency trders during the ‘flash
crash’ remain unresolved,” he says in prepared testimony.

He also addresses potential conflicts of interest, including so
called liquidity rebates by which brokers are given incentives to route
transactions through a particular exchange and which subsidize “certain
of the high frequency trading strategies.”

Joe Gawronski, President of Rosenblatt Securities, is defending the
current market structures, saying, “Despite its complexity and largely
ad hoc way in which it was created, modern market structure generally
results in better outcomes, for both retail and institutional investors,
than what it replaced.”

Thomas Joyce, Chairman of Knight Capital, is testifying that
“virtually every dimension of U.S. equity market quality is now better
than ever.”

Dunan Niederauer, the CEO of NYSE Euronext, is arguing for rules
that direct more transactions through established exchanges. “Is it
fair, for example, that a small number of participants in private
markets received the highest quality orders, with no benefit to the
public markets? he asks.

Quantlab Financial President Cameron Smith’s prepared testimony
defends the impact of high speed trading, saying studies “find that it
tends to improve price discovery and lower, not increase, short term
volatility in the market.”

High speed trading accounts for most transaction volume and as
speed continues to increase, so that a dozen “micros” are achievable —
referring to as little transaction time a 12 microseconds, more issues
arise, including that of “jitter,” random flunctations in order flow.

A second panel before the committee includes Dan Mathisson,
managing director of Credit Suisse Securities, William O’Brien, CEO of
Direct Edge, Jeffrey Solomon, CEO of Cowen and Company and Jim Toes,
president of the Security Traders Association.

** MNI Washington Bureau: 202-371-2121 **

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